Oil Traders Confront a New World Without the China Bull Factor

(Bloomberg) -- For the first time in two decades, China no longer looks like the engine driving global crude demand, which is uncharted waters for many of the traders and executives that gathered for the APPEC oil conference in Singapore this week.

China’s economic slowdown is dire, with its property market in the doldrums and consumer confidence weak. Add to that structural changes from an aging population, the energy transition and a growth model that leans less heavily on big-ticket infrastructure, and it’s bad news for oil.

For crude merchants and analysts, that means a big adjustment.

“I’ve had the discussion internally with my traders. I asked them one question — how long have you been trading? They’ll say 10 years,” said Janet Kong, the chief executive officer of Hengli Petrochemical International Pte., a trading arm of one of China’s largest private refiners. “My reply is, you haven’t really traded a world where China is not a bullish factor.”

China’s evolution into the world’s biggest oil importer has supported crude prices for decades and provided business opportunities for merchants from Shanghai to Dubai and London. A tolerance for low-digit GDP growth — perhaps even missing this year’s 5% target — makes that difficult to sustain.

An informal Bloomberg survey of ten analysts and traders on the sidelines of the Asia Pacific Petroleum Conference found that oil consumption in China is expected to grow by no more than 300,000 barrels a day in 2025. That’s about 25% lower than latest projections from International Energy Agency and the Organization of Petroleum Exporting Countries. 

The poll showed that a 200,000 barrel-a-day expansion is expected for this year.

Respondents, who asked for anonymity as their views are not public, cited higher penetration of electric vehicles, the steady uptake of liquefied natural gas-powered trucks and government restrictions on crude imports and fuel exports. There’s also little spare storage capacity for Beijing to expand its strategic oil reserves.

‘Half Life’

“From a structural perspective, China now looks unlikely to be the behemoth for oil demand and perhaps even for other commodities that it once was,” Energy Aspects Ltd. analysts including Amrita Sen and Livia Gallarati said in a note earlier this week, “We remain confident that the government will not allow economic growth to collapse, but growth will no doubt be lackluster for the foreseeable future.”

Other APPEC attendees, including Hengli’s Kong, cited the changing nature of oil demand. Chemical feedstocks to produce products such as fibers account for one-third of the nation’s total consumption — at about 5 million barrels a day — and that proportion may grow as road transport goes green. But those goods have a far longer “half life” than fuels, Kong said, which translates to less crude being refined over time.

China’s challenging outlook clouded the annual event in Singapore, which is Asia’s largest oil conference. With Brent crude near $71 and the world’s second-largest economy showing few signs of an imminent revival, traders and refiners are bracing for lower profits.

Still, refining capacity in China continues to increase. Expansions at China Petrochemical Corp.’s Zhenhai and Cnooc Ltd.’s Daxie refineries, and a brand new greenfield facility by Shandong Yulong Petrochemical Co. will add a combined 740,000 barrels a day of capacity.

However, the world’s No. 2 oil consumer will have to live with processing rates under 70%, traders and analysts surveyed by Bloomberg said. 

Shifting Sands

Not everyone is calling a peak for Chinese fossil fuel consumption — or writing off the potential for Beijing to boost growth. Trafigura Group Chief Economist Saad Rahim said China was still adding 8 million to 9 million new combustion engine vehicles a year.

“To me, if you’re adding new vehicles, it doesn’t feel like peak,” he said.

Others agree there is still room for growth, even in a less commodity intensive environment.

“If the Chinese economy improves, we’ll see more discretionary driving,” said Sri Paravaikkarasu, director of market analysis at Phillips 66 International Trading. “But we should all embrace a slower demand growth from China in the coming years.”

On the Wire

Finance chiefs in Beijing are testing new ways to boost the economy by encouraging demand, breaking with long-established practice as threats to the country’s growth target mount.

China has strongly advised its carmakers to make sure advanced electric vehicle technology stays in the country, people familiar with the matter said, even as they build factories around the world to escape punitive tariffs on Chinese exports.

Typhoon Bebinca is forecast to hit the east coast of China early Monday, threatening to bring excessive rainfall that could disrupt oil refineries and LNG import terminals and paralyze transport.

Lead futures in Shanghai may be bottoming out as Chinese smelters cut output to shore up margins.

The Week’s Diary

(All times Beijing unless noted.)

Thursday, Sept. 12:

• China’s monthly CASDE crop supply-demand report
• Summit on China’s Belt and Road initiative in Hong Kong
• Meeting of China’s National People’s Congress standing committee in Beijing

Friday, Sept. 13:

• China weekly iron ore port stockpiles
• Shanghai exchange weekly commodities inventory, ~15:00
• Meeting of China’s National People’s Congress standing committee in Beijing

Saturday, Sept. 14

• China new home prices for August, 09:30
• China industrial output for August, including steel & aluminum; coal, gas & power generation; and crude oil & refining. 10:00
• Retail sales, fixed assets investment, property investment, residential sales, jobless rate

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